Taking out a mortgage is a gamble for both you and your lender. If you’re in a secure and permanent job, you may not think it’s much of a gamble on your side – but you never know what’s round the corner. Your lender is paying out a huge sum of money, and needs to know that you can continue to repay it over the term of the loan. So it’s not surprising that so many lenders try to get you to take out mortgage protection insurance.
First and foremost, be clear about one thing. You do not normally have to take out mortgage protection insurance. Some lenders may in fact require you to have it as a condition of the mortgage, but even then, you don’t have to purchase it from them.
It’s an extra expense, so shop around for the policy that provides the best cover.
So when you are shopping around, what should you be looking out for?
• You may be considering taking out your mortgage protection insurance from your mortgage lender simply because it’s more convenient to have a single monthly payment. However, remember that if they roll the premium into the monthly mortgage payment, it nearly always works out more expensive than having a separate policy. Request an itemised bill showing your mortgage payments with and without your insurance premium, so that you know exactly what you are paying.
• Consider what would be the most likely reasons you might have to claim on your mortgage protection insurance, and check that any policy would cover these. For instance you may fear you are at risk from a heart attack, or you may be a contract worker and worry about finding yourself without work. It’s no good paying for mortgage protection and then finding it doesn’t pay out when you need it. Examine exclusions in the small print of every policy and make sure you find one that gives you the cover you need.
• Look carefully at every policy to see what the payout covers. Some mortgage protection insurance policies only cover the cost of your actual mortgage payments. However, there are lots of other mortgage-related expenses that you would also need to cover – for example, endowment premiums, building and contents insurance premiums etc. Without these, you could still find yourself in difficulties even if your mortage payments were being made, so try to find a policy that covers these as well.
If you just take the first mortgage protection insurance policy you are offered, or take your lender’s policy for convenience, you could find out too late that it isn’t really any use to you. Look carefully at different policies and ask a broker to help you shop around. And above all, make sure the policy you settle for is primarily for your protection, not your lender’s.